Tuesday, December 5, 2023

China’s eyes bigger than its stomach 

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Things have turned sour in the past six weeks, with market troubles that aren’t confined to red meat.
In China, New Zealand is strongly associated with good-tasting beef and lamb.
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It’s a strange old time for both sheep and beef markets. 

Plenty of people were banking on schedules doing their traditional lift through winter, which definitely wasn’t a bad call in autumn, when a lot of store stock were being bought for this trade. Back then China appeared to be coming out of lockdowns with a bounce, the United States was running short of its own cattle supplies, and European lamb buyers were more active than expected, which all boded well for future farmgate prices.

But it’d be safe to say things have turned sour over the past six weeks, especially since mid-June. Processors have taken significant cuts out of lamb and mutton and are slowly chewing away at almost all cattle classes too.

AgriHQ has been collecting lamb slaughter price data since 1996 and since then prices have only once come back in winter. That was in 2003 when lamb eased only 10 cents to $4.25/kgCW – which is $6.90/kgCW in today’s dollars when adjusting for inflation.

So what’s going on?

The main source of pain is China. It was key to pushing beef, lamb, and mutton prices to brand new heights through 2021 and 2022, but it’s starting to look as though it was a bit overenthusiastic.

Commentary from all quarters points to an overabundance of expensive product held up in inventories over there – and traders are struggling to sell it without taking losses. Those Chinese traders are therefore reluctant to buy any extra volume beyond what they already have and are willing to do so only at cut-rate prices. Exporters here and abroad are even having to renegotiate prices once containers full of meat are landed in China.

It’s easy to see how this situation has developed when you look at China’s import data, at least for beef. A record 2.8 million tonnes of beef was imported over the past 12 months, an extra 500,000t on top of last year. Before the pandemic this had never gone over 1.7 million tonnes, though some entered via the grey trade that doesn’t show on official figures. 

This past year’s number would’ve been even higher had Brazil not been cut off for around two months due to an atypical mad cow disease case. It’s unlikely this latest flood of beef into China will slow much over the short term, given what we’re hearing from overseas.

Another factor that gets overlooked somewhat is the pork market. This can be a major driver of consumer trends as it’s China’s default meat choice. Pork prices went through the roof in 2019 when African Swine Fever (ASF) ripped through China and killed off supplies. However, now the situation has mainly settled down, live hog prices there are leveling out to pre-ASF levels. That’s about half the price of 2020.

Market troubles aren’t limited to the red meat sector, though. You can name almost any commodity that trades into China – logs, wool, dairy products –  and virtually all are having a tough time. So while supplies are definitely a key part of the equation, such a universal shift points to economic issues being just as influential.

Key consumer spending metrics during China’s latest public holiday came up short of pre-pandemic levels. And other data points, such as home and car sales, have been slow since before that. A lot of China’s economy is based on its property development sector, which has now been in rough waters for almost two years. Only recently a large property development project didn’t sell despite being offered at 20% of its appraised value. Likewise, news has emerged that another major state-backed property company has reportedly run into cash-flow issues.

This article was written by AgriHQ analyst Reece Brick. Subscribe to AgriHQ reports here.

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